More often than I would expect, I am asked about how to account in QuickBooks for the situation where a company’s customer pays its vendor directly. Most often this is because the vendor will not work with that company otherwise, and usually this is due to issues of payment in the past. So the vendor in order to conduct business going forward will require a company’s customer to pay them directly. Regardless of the reason it comes up and we need to know how to handle this properly in QuickBooks.
The question then becomes, how do I record the payment from my customer to my vendor in QuickBooks?
What NOT to do
Normally I would record a customer’s payment, deposit the money and then pay my bill to my vendor. That’s not going to work in this case. You could enter all of that info, and record the deposit and bill payment so that it washes through your checking account, but I am not even going to show you how to do that because it just isn’t clean. It’s messy / sloppy bookkeeping and if someone were reviewing your books to determine whether they wanted to provide financing and they saw this kind of thing it could have an adverse affect on your chances of getting funding because it ruins the integrity of your books. Simply put, there should not be a deposit recorded in your bank account unless money was actually deposited into your bank account and there should not be a payment recorded in your books unless you’ve actually made one.
The right way
The very simple and direct way to deal with this is through a journal entry, reducing the customer’s receivable and reducing the vendor’s payable.
QuickBooks will not let you post to more than 1 accounts receivable or accounts payable account in the same transaction.
You have to break up your entry into two separate entries, and use a clearing account. Clearing accounts must ALWAYS zero out. The video will show you exactly what this looks like in terms of how to record a payment that was made directly from your customer to your vendor in QuickBooks.
Want the QuickBooks File used in the video so you can drill into the transactions?